Brokerage chief points finger at failure of risk management

Terry Smith, one of the City's most outspoken figures, has given a damning assessment of the risk-management failures that have left the credit market in crisis. He pointed to a fundamental "divorce" between loan providers and those who assume the loan risk.

Recalling his days as a bank manager, the head of specialist brokerage Tullett Prebon said: "People always said they are nervous about seeing their bank manager - I was one - and the bank manager was even more nervous because when he lent you the money he was responsible for its repayment for the next several years. He sat there and managed his branch, and the money that he lent had to be serviced. If it wasn't, there was bloody trouble.

"Now you've got a divorce between the origination of the credit and the person who carries the can for its [the loan's] service ... You've got loan origination companies, particularly in the mortgage area, who originate loans which are packaged up and sold on in securitised bundles to hedge funds, life companies, pension funds and, it would appear, German Landesbanks. Clearly the guys in those [loan] origination businesses are not too worried about the subsequent service of the loan, are they?"

Mr Smith said the first principles of banking had again been flouted by institutions willing to buy into complex investment structures with insufficient security of financing.

"Most of the people who are purchasing this stuff have got no retail deposit base in the currency at all," he said. "There is a divorce between the deposit base and the loan ... In every banking crisis there has ever been what you want to have is retail deposits, because liquidity dries up pretty damn quick in the wholesale market."

Market turmoil, however, has been nothing but positive for Tullett Prebon, with revenues ahead by more than 30% for June, July and August. Mr Smith said the group expected operating profit for 2007 to finish "at the top end of analysts' expectations" at between £130m and £135m.

"I can't see the current turmoil ending in the very near future," he said.

Tullett Prebon said it had been rapidly building its credit derivatives division, hiring broking staff in Europe, North America and Asia Pacific. Asked if activity in the area was peaking, Mr Smith said: "It is currently extremely busy, hence my desire to be in it right now."

He was speaking after Tullett Prebon reported operating profit of £65m for the six months to end June, up 8% at constant currencies, on revenue up 12% at £372m.